When A Phase III Company Has The Loan Called… What Are The Options?

Medical Patents Broker Inc.
By Kenneth Pearce, President

For Phase III companies, a combination of expected, predictable outcomes is often is often complicated by a few unexpected hiccups that could not be anticipated. As we know, the longer the hiccups last, the more the patient suffers.

Long ago, when I was a hospital pharmacist, there was a patient who had the hiccups for more than three weeks straight. The docs tried everything they could think of, and the hiccups just continued. That patient was miserable, to say the least!

When a clinical-stage company hits a major financial hiccup—like having a massive loan called with only two months until debt payment day—the boardroom gets just as miserable.

Is there anything that can be done when the cash register is empty? There are no state-of-the-art lifesavers, but some high-stakes options do exist:

1. Debt-for-Equity Swap (The Ownership Dilution)

If the lender is willing, the company can settle the loan by issuing shares of stock to the debt holder instead of cash.

• The Positive: Bankruptcy is stayed, at least for a period of time, giving the medical invention a fighting chance to reach the finish line.
• The Dynamic for Private Companies With Accredited Investors: MPB’s lawyers tell me the process is relatively straightforward. There is a bit more leeway with the SEC, but every jot and tittle needs to be in place.
• The Headaches for Public Companies: Most people think that the board can just sell treasury shares into the public market. Depending on the circumstances and the amount of dilution, many times this can be correct. But there is still the Form 8-K to file. Furthermore, the NYSE and/or Nasdaq often require a full shareholder vote when a company wants to issue more than 20% of its shares to a lender. For a public company, it is likely better to take out a loan from a different lender to pay off the current one, taking on more debt just to keep moving toward the patient.
• The Crowd Funded Company: To attempt to dilute the shares of the moms and pops who invested a $1,000 for shares would be to dive straight into the pit of a potential class action. It's a harbinger that there are simply not enough shares on earth that could close that deal.

2. A Structured "Royalty Monetization" or "Forward Sale"

When the clinical data is excellent and it looks like FDA approval is only a few months away, a specialized pharmaceutical/medtech royalty fund can step in. The fund infuses the Phase III company with the immediate cash needed to cross the finish line in exchange for a portion of the future revenues or royalties of the product once it hits the market.

• The Reality: It keeps the lights on, but you will definitely need a formidable team of lawyers to navigate this type of structured financing.

3. Selling a Piece of the Portfolio

When the test results in humans look great, the Phase III entity can sell a 49% (or perhaps larger) share of the patent portfolio to an outside buyer to receive adequate cash to complete the mission.

• The Trade-Off: Future ROI for the founders is diminished, but future losses are also shared and diminished.
• The Long Game: If they successfully finish the trials, they can eventually offload the remaining asset to a third-party manufacturer, receive sufficient cash, and do it all over again with a brand-new medical invention. Medical inventors appear to be a totally different breed.

🎽 The President’s Viewpoint

Since I am not a VC, private banker, investment banker, or MBA, I suspect there are other avenues to save a Phase III company. During my lifetime, brand new ways to move money, make money, and lose money have been constantly created.

Hiccups make me uncomfortable. Even though medical people are trained to not get too close to those they serve, I could truly feel for that hospital patient with unrelenting hiccups for three weeks.

In truth, I don’t think I understand enough to fully empathize with a Phase III company’s potential end-of-life hiccups. It would be difficult for management. Unless a company lists a few months in advance with MPB, it’s unlikely that a marketplace listing can help them at the midnight hour. But if the Phase III study dies because of a financial hiccup, then a treatment that could have truly helped the patient is likely lost forever.